There are two kinds of asset: FIXED
ASSETS and CURRENT ASSETS. Click on these links for lists of examples.
There
are two kinds of liability: CURRENT LIABILITIES and LONG TERM LIABILITIES. Click
on these links for lists of examples.
The
important point to note here is the equals sign denoting that this is an equation.
Withouy going into a detailed consideration of the mathematically reasoning, we
know that when we move an item from one side of an equation to the other, then
its power or operation changes i.e. a 'plus' becomes a 'minus'. This rationale
underpins the book-keeping treatment of assets (one side) and capital and liabilities
(the other side).
If we accept that when we record a change
in value of an asset, we do the OPPOSITE to record a likewise change in capital
or liabilities (on the opposite side of the equation).
The
increase or decrease represents the two possible changes in value when a financial
transaction takes place.
Note that the RULE OF OPPOSITES applies
here (as in all double netry transactions) and helps us decide what to do when
recording any transaction involving assets, liabilitities or capital.
All
we have to remeber from the above table is that an increase in an asset is a debit.
from this basic knowledge we can deduce what to do about decrease in assets or
indeed, increases or decreases in liabilities and/or capital. This basic truth
makes accounting more than just a learn and churn subject, but insetad a skill,
and one worth learning at that (it is even enjoyable deciding what to do because
you are in effect solving simple puzzles as you work your way through a problem,
to arrive at a solution to an overall much more comples situation - magic!).
In this instance an asset (motor vehicle)
increases in value (DEBIT) and another asset (cash) decreases in value (CREDIT).
Insert
ledgers and amounts etc
Double
entry rules for assets, liabilities & capital
The
rules of double entry always cause students concern! What does DEBIT and CREDIT
mean?
It is really not
as difficult as it all sounds!
First,
we record all financial transactions in records called accounts, and we always
record every transaction twice (double entry book-keEping).
We
record one entry on the left hand side of one account and the other entry on the
right hand side of the other account.
We
call the left hand side of an account the DEBIT SIDE and the right hand side the
CREDIT SIDE.
When we say
DEBIT an account we simply mean that we are recording one half of the double entry
on the LEFT hand side of an account.
When
we say CREDIT an account we simply mean that we are recording one half of the
double entry on the RIGHT hand side of an account.
So
what are the rules to remember regarding ASSETS, LIABILITIES and CAPITAL?
The
table below summarises what we should do when recording entries, remembering that
every transaction has two parts, and this means one entry on the LEFT (DEBIT)
side of one account, and one entry on the RIGHT (CREDIT) side of another account.
| | ASSETS | LIABILITIES | CAPITAL |
| Increase | Debit | Credit | Credit |
| Decrease | Credit | Debit | Debit |
You
will hopefully have recognised a pattern here involving what I call the RULE OF
OPPOSITES.
If we do one
thing to an asset the we do the opposite to a libility, and vice versa!
So
if we can remember to DEBIT an ASSET when it increases in size we should be able
to work out what to do if a LIBILITY also increases.
EXAMPLE
On
2nd January a business buys a Motor Vehicle for £5,000, paying by cheque.
First
we identify which accounts need to be used - here Motor Vehicle (an asset) and
Bank (another asset - bank used because the cheque is an instruction to the bank
to pay someone from your account).
The
double entry then becomes:
DEBIT
Motor Vehicle £5,000 (an increase in the value of Motor Vehicles)
CREDIT
Bank £5,000 (a decrease in the value of funds in the bank)
Motor
Vehicles
| Debit
side | Credit side |
| 2nd Jan Bank
£5,000 | |
Bank
| Debit side | Credit side |
| | 2nd Jan Motor Vehicles £5,000 |
If you were to read these accounts
you would see from the Motor Vehicles account that Motor Vehicles had been bought
and paid for using funds from the Bank.
If
you were to look at the Bank Account you would be able to see that funds from
the Bank had been used to buy a Motor Vehicle.
Every
financial transaction has two parts and these are recorded in their respective
account.
More
Examples
EXAMPLE
involving INCREASE in an ASSET and DECREASE in an ASSET
On
2nd January a business buys a Machine for £3,000, paying by cash.
First
we identify which accounts need to be used - here Machine (an asset) and Cash
(another asset).
The double
entry then becomes:
DEBIT
Machinery £3,000 (an increase in the value of Machinery)
CREDIT
Cash £3,000 (a decrease in the value of funds in the cash box or till)
Machinery
| Debit side | Credit side |
| 2nd Jan Cash £3,000 | |
Cash
| Debit side | Credit side |
| | 2nd Jan Machinery £3,000 |
If you were to read these accounts
you would see from the Machinery account that Machines had been bought and paid
for using cash.
If you were
to look at the Cash Account you would be able to see that cash had been used to
buy a Machine.
EXAMPLE
involving INCREASE in an ASSET and INCREASE in a LIABILITY
On
22nd January a business buys equipment costing £70,000 on credit terms from
Garth Stimpson (a creditor).
First
we identify which accounts need to be used - here Equipment (an asset) and Garth
Stimpson - Creditor (a liability).
The
double entry then becomes:
DEBIT
Equipment £70,000 (an increase in the value of Equipment)
CREDIT
Garth Stimpson £70,000 (an increase in what is owed to a creditor)
Equipment
| Debit side | Credit side |
| 22nd Jan Garth Stimpson £70,000 | |
Garth Stimpson - Creditor
| Debit
side | Credit side |
| | 22nd
Jan Equipment £70,000 |
If
you were to read these accounts you would see from the Equipment account that
Equipment had been bought on credit from Garth Stimpson.
If
you were to look at the Garth Stimpson Account you would be able to see that he
was owed £70,000 in respect of equipment obtained from him.
EXAMPLE
involving DECREASE in an ASSET and DECREASE in a LIABILITY
On
28th January a business pays Garth Stimpson (creditor) a cheque for the £70,000
he is owed.
First we identify
which accounts need to be used - here Garth Stimpson - Creditor (a liability)
and Bank (an asset).
The
double entry then becomes:
DEBIT
EquipmentGarth Stimpson £70,000 (a decrease in what he is owed)
CREDIT
Bank £70,000 (a decrease in the amount of money in the bank)
Bank
| Debit side | Credit side |
| | 28th Jan Garth Stimpson £70,000 |
Garth Stimpson - Creditor
| Debit
side | Credit side |
| 28th Jan Bank
£70,000 | |
If
you were to read these accounts you would see from the Bank account that Garth
Stimpson had been paid £70,000.
If
you were to look at the Garth Stimpson Account you would be able to see that he
was paid £70,000 by cheque.
EXAMPLE
involving INCREASE in a LIABILITY and DECREASE in a LIABILITY
TO
DO
Reasons why
we DEBIT and CREDIT assets, liabilities and capital when we do.
TO
DO
